The euro fell over 1% to trade at under USD $1.30 on Wednesday, a 12 month low and remained at a 9 month low against the pound as renewed concern about the euro zone once again drove the markets into risk aversion.
The euro came under renewed pressure as nervous investors fretted about the euro zone debt crisis with Italian bond yields rising to a record 6.47% at the latest bond auction as sentiment soured by a poor session in the European and US equity markets. Nerves about the Greece’s economy and uncertainty about it reaching a deal with the IMF also plagued market confidence.
Comments from German Chancellor Angela Merkel also rattled an already jumpy market. Merkel warned there would be no quick fix for the euro debt crisis and that a solution requires patience.
The International Monetary Fund (IMF) has given the green light to the next tranche of aid to Ireland, worth €3.9 billion, as part of last year’s rescue loan. The loan forms part of the €85 billion package approved last December by the IMF and the European Union. The international organization made no immediate comments on the review although it does plan to release information on the deliberations at a later time.
The IMF stated that Ireland has now received €13 billion of the €23 billion total it expects to lend to the country over three years.
The credit ratings agencies were in action again yesterday as Fitch cut the ratings of several European banks’ due to the sovereign debt crisis warning of the “stronger headwinds” that the financial sector is now encountering. Specifically, the credit rating agency downgraded French banks Crédit Agricole (to A+ from AA-) and Banque Federative du Crédit Mutuel (to A+ from AA-), Finnish Pohjola Group (to A+ from AA-), Holland’s Rabobank (to AA from AA+) and Denmark’s Danske Bank (to A from A+).
Fitch, however, noted that while the outlook on Danske is negative those for the other banks remain stable.
One of the main reasons for the downgrades on Crédit Agricole and Danske Bank is their exposure to euro zone countries through their subsidiaries.
On Tuesday evening, the Federal Reserve kept US interest rates on hold and said it would not initiate any new stimulus measures. It added that the US economy was making slow by steady progress.
The pound remained close to a 9 month high against the euro despite data showing the UK jobless claimant count rose to a 17 year high. UK unemployment rose by 128,000 in the three months to October to a reach a total of 2.64 million, according to the Office for National Statistics. The number of unemployed people in the UK is the highest since 1994 with the unemployment rate, which reached 8.3% of ‘economically active’ people, was the highest since 1996.
Dr Howard Archer, chief UK economist at IHS said that while the data are not as bad as feared overall, this was of limited comfort as they still showed a troubled jobs market.
“Further marked deterioration seems very much on the cards given faltering economic activity and a number of recent surveys pointing to companies scaling back their employment plans ,” he said.
The European commissioner for internal markets and services, Michel Barnier, has criticized UK Prime Minister David Cameron’s requests for greater independence from EU financial sector supervision in an opinion piece published in The Telegraph.
Barnier writes that “it sounds as though the (British) government is arguing for two single markets: one for financial services from which it can opt out, and one for the rest of the economy. That is simply not possible. When you are part of a club and enjoy its benefits, there are rules.”
The EU commissioner insists that the single market purposefully ruled out national veto powers in order to force the governments involved in the pact to negotiate. Barnier also reminds Cameron that the financial sector represents “around 10% of British GDP and several hundred thousand jobs in Britain,” while at the same time approximately 54% of UK exports go to the single market.
Barnier also points out that “in financial services, the ‘safeguards’ asked for by the UK at the European Council last week would have reintroduced a dose of unanimity in decision-making. This is neither necessary nor desirable.
“It is not necessary since the UK has never been outvoted on a proposal affecting the City since I became the Commissioner responsible. It is not desirable because it opens the way to other demands for protection of sectors considered to be of national importance and ultimately to a patchwork of arrangements undermining the very notion of a single market.”
